Whether your child is just learning how to crawl or starting to master their times tables, you’re probably thinking a lot about what their future will look like. 

Your child will likely be interested in some form of post-secondary education – be it college, university or an apprenticeship. That’s why it’s essential to start planning for the costs of education now. 

But higher education can be expensive. The average annual cost of post-secondary education in Canada is $19,499.1

So, how can you help your child afford to continue their education? Enter RESPs, a smart and ideal way to fund a child’s future ambitions. 

 

Let’s start with the basics: What is an RESP?

A Registered Education Savings Plan (RESP) is the most common education savings vehicle. It allows parents, grandparents, family and friends to save towards a child’s post-secondary education. 

Although RESP contributions are not tax deductible, they allow savings to compound and grow tax-efficiently until the beneficiary/ child is ready for college or university.

Frequently asked questions

 
How much can I contribute to an RESP? You can make contributions of up to a lifetime maximum of $50,000 per beneficiary (i.e., your child or whoever the RESP is set up for).
What types of RESPs can I chose from?

There are options: 

➞ A family plan to pool contributions for one or more children in the same family until age 31 

➞ An individual plan to name one beneficiary without age or relationship restrictions (it can even be yourself)

Are my RESP contributions tax deductible?

Contributions are not tax-deductible, but the investment income earned inside the plan is tax-deferred until you withdraw it. 

When the funds are taken out of the RESP as an Education Assistance Payment (EAP), the investment income and grants are considered taxable income to the beneficiary. Your child, or beneficiary, will need to make sure they include this amount as part of their income in the year it is withdrawn

How can I make an RESP contribution? You can deposit a lump sum or arrange to have Pre-Authorized Contributions (PAC) taken from your bank account on a regular basis. To see how quickly your savings can grow, visit scotiabank.com/PAC and try out our interactive PAC video. 
What if my child decides not to pursue a post-secondary education?

You have several options: 

➞ You can name another beneficiary, if certain conditions are met. 

➞ You can make a tax-free withdrawal of your original contributions, but any grants and bonds received must be returned to the government. 

➞ You may be able to transfer up to $50,000 of the investment income, tax-free to your Registered Retirement Savings Plan (RRSP) or your spousal RRSP, if you have enough contribution room available. Plus, you can also withdraw the investment income as cash (which would be subject to taxes).

Maximizing your RESP’s value with federal government incentives3

The government partially matches contributions to an RESP in the form of grants, helping to increase education savings faster and more effectively.

Canada Education Savings Grant (CESG) 

  • The Canada Education Savings Grant (CESG) matches 20% on the first $2,500 of your eligible contributions each year. So you can receive up to $500 (per year, per beneficiary under 18) to a lifetime maximum of $7,200.4 
  • Depending on your net family income, you could also receive an additional CESG, of 10% or 20% on the first $500 contributed each year, up to $100 (per year per beneficiary under 18) towards the maximum lifetime CESG of $7,200.4

 

Let’s look at net family income in more detail.

The additional amount of CESG may be up to:

-         $100 if the 2021 adjusted net family income is $49,020 or less ($500 x 20% = $100)

-         $50 if the 2021 adjusted net family income is greater than $49,020 and up to $98,040 ($500 x 10% = $50)

Canada Learning Bond (CLB) 

  • An eligible child born on or after January 1, 2004 may receive the Canada Learning Bond, which offers a $500 initial deposit, then $100 per year until the eligible child reaches 15 years of age, to a maximum of $2,000.5 You do not have to contribute to your RESP to apply for or receive the CLB.

Consider these two RESP contribution strategies

  1. Annual investment strategy 
    This is the most common savings strategy which allows parents and family members to save significant funds, while maximizing annual government grants, to help fund post-secondary education.
  2. Lump-sum investment strategy 
    For those with the financial means, a one-time maximum contribution of $50,000 per beneficiary is an efficient savings strategy to accumulate as much money as possible for post-secondary education.
  Annual investment strategy Lump-sum investment strategy
How does it work? Contribute $2,500 (or approximately $208 monthly) each year until the beneficiary turns 17, with an additional lump-sum contribution of $7,500 in the final year Contribute the $50,000 lifetime maximum in year one and remain invested until the beneficiary reaches age 18
Your total contribution $50,000 $50,000
Canada Education Savings Grant (CESG) amount $7,200 lifetime maximum ($500 per year, per beneficiary under 18) $500 (as there is only one contribution made in the first year)*
Investment growth (Assumes a 4% annual rate of return) $25,200 $51,804
Estimated value of RESP when beneficiary turns 18 $82,400 $102,304
What is taxable and to whom? Both the CESG ($7,200) and the Investment growth ($25,200) are taxable in the beneficiary’s hands upon withdrawal (a total of $32,400) Both the CESG ($500) and Investment growth ($51,804) are taxable in the beneficiary’s hands upon withdrawal (a total of $52,304)

Annual vs. lump-sum investment strategy

The following graphs compare both strategies based on an assumed 4% annual rate of return.

Investment Strategies
Legend

Another option to assist with education costs: Tax-free Savings Account (TFSA)

If you have concerns that an RESP may not provide enough funds to cover post-secondary costs, another viable option to consider that can effectively complement your RESP is a TFSA. 

RESPs and TFSAs are similar as contributions made to either type of account are not tax deductible.

Let’s look at some benefits of a TFSA: 

  • Income earned within a TFSA is never subject to tax, even when funds are withdrawn
  • Funds within a TFSA can be used for any purpose – not just for education 
  • The cumulative TFSA lifetime contribution limit is $75,500, with a current annual limit of $6,000. The lifetime maximum contribution for an RESP is $50,000 

A Scotiabank advisor can develop an education savings strategy that works with your financial situation, incorporating applicable government incentives, to help you meet your child’s education needs. 

Ready to get your finances on track for your future? Book an appointment with a Scotia advisor